Predicting the Future — Observations from the Mary Meeker Internet Report
Mary Meeker’s latest report on Internet Trends has two interesting slides about market capitalization of world’s biggest companies. For those who are not a tech entrepreneur or venture capitalist, this is the tech-geek equivalent of the end-of-year list by Time magazine.
Why would market capitalization be interesting to observe? Well, for one, it shows where the value is created in our world. And secondly, observing how market capitalization ranking migrates over time can point to where value creation business opportunities are in the future. Interested? Let’s take a closer look. Below are the two rankings for 2017 and 2012.
An obvious conclusion from the comparison of rankings from 2012 to 2017 — and where Mary draws her intended conclusion — is that tech companies have dramatically moved up in rankings. It makes sense because, as we have personally experienced over the last 5 years, the world is being eaten alive by technology. Our lives now largely depend on iPhones, Google, Facebook, Instagram, Youtube, Uber, you name it.
However, what was less discussed in Mary’s report — and perhaps less obvious — is what’s left over in the 2017 ranking. Of world’s top 20 biggest companies other than technology companies, what types of companies are they and what industries are most resistant (so far) to technological change?
The answer (drum roll …) — financial services. Financial service companies dominate the list of “left-overs” with 5 of the top 20 world’s largest companies, or close to half of the non-tech companies.
Behind each advance in ranking of the tech companies, one theme is consistent — each of them solves a big problem previously unsolved under the traditional industry construct, leveraging either software or hardware. So when we ask ourselves why financial services industry has been so resistant to technological change, the reasons can only be either: 1) there isn’t a problem to be solved, or 2) the problem is so hard it hasn’t been solved yet.
So which is it? Clearly there are many problems that haven’t been solved in finance. The way stocks get bought, while largely electronic, still can be made more efficient; for this, we have Robinhood, the no-fee stock trading app, working on this problem. The way your bank account pays you a mere 0.01% a yearis a problem in light of the 2.2%+ US inflation (see how Your “savings” account has a negative (-2.14%) real rate of return); for this, we have Beam, a new, high-interest mobile bank account that pays 2–4% a year. There are many innovative financial apps and fintech products (payment, banking, stocks, other investing, insurance) we won’t have time to get into here, but the point is, there are many problems to be solved in financial services, and most of them are about innovation around cost.
Innovation around cost makes sense, because any financial service company is ultimately an intermediary business. In other words, financial service companies act as go-betweens, not unlike the real estate brokers for your home. For go-betweens, the predicted impact of technological change in the long term is a clear one — technology will reduce the number of go-betweens as well as how much go-betweens will charge us for their service. This is perhaps as clear of a future prediction as it gets.
Frankly, cost has been the centerpiece of nearly every technological change we’ve experienced so far in the “great ranking migration” from 2012 to 2017. Apple reduced the cost of computing and our cost of interaction with the digital world (through ease of use). Google reduced the cost of information lookup (remember writing your paper from something called a library?). Amazon reduced the cost of buying merchandizing (it’s cheaper than going to Macy’s). Facebook and Tencent reduced the cost of interaction and information sharing between us. Wherever cost is removed, efficiency of distribution is increased. And when we have a more cost-efficient distribution of product or service, the product or service is democratized. This perhaps has been the single most consistent trend behind the technological revolution over the past century.
If there clearly exist opportunities to solve a cost problem in financial services, the reason for lack of technological change must be that the problem is really hard to solve. Indeed, a new financial service company requires a government-issued license to operate and service the public, which is a really, really hard barrier to overcome. It took over a year for the stock trading app Robinhood to get its brokerage license, and Beam is still in prelaunch. Unlike the industries of advertising (Google), commerce (Amazon) and computing devices (Apple), the license requirement in financial service industry serves as a moat to protect aging incumbents, preventing new entrants from disrupting the “old boys’ club”. That being said, the license requirement in financial services is there for a very valid reason, as it protects the consumers from unknown financial risks.
However difficult it is, one thing is certain: drawing upon the disruption history of other industries as a prediction of what’s to come, technology companies’ transformation of financial service industry will be unstoppable. As your personal financial advisor comes online (“robo-advisors”), as your neighborhood bank branches continue to disappear, it’s not difficult to imagine this top 20 ranking in year 2025 will be even more dominated by “technology” companies, largely driven by an anticipated transformation in the financial service industry.
After all, it’s really not about the dominance of “technology” in rankings. Rather, it’s about humanity’s continuing drive towards a more cost-efficient way to live and work (with — for the most part — better software and hardware), and about making essential products and services inexpensively and broadly available to all, sector by sector, industry by industry. Needless to say, there remain lots of unfinished work in the financial sector.
What’s surprising is that, in Mary Meeker’s 355-page report, innovation in US financial service industry was not discussed at all. Given Mary’s prior background with Morgan Stanley and Merrill Lynch, this is naturally a bit surprising, and may point to a larger, collective bias of the venture capital community today towards the future of US fintech innovation.
